37% of Trust Fund Recovery Penalty Actions Delayed or Inadequate

Companies are required to withhold employees’ salaries for trust fund or payroll taxes owed. These taxes include the Federal income tax, social security, and medicare tax. They are also required to remit them to the IRS and file quarterly 941 tax returns.

Unfortunately, sometimes businesses neglect to pay these taxes after withholding them from employee paychecks and end up using the cash for other reasons (sometimes to just stay in business). However, this is a big mistake not only because they are required to send these taxes to the IRS quarterly but because it is not the business’s money in the first place. This is a serious problem currently because as of June 30th, 2012 employers owe $14.1 billion in delinquent payroll taxes to the IRS.

What eventually happens to a business that does not remit payroll taxes, is the IRS will issue liens against the business and/or attempt to levy the business’s bank accounts. If the IRS is not able to collect the payroll taxes owed by these measures, the IRS will personally assess them against the member(s), owner(s), directors, shareholders or persons responsible for remitting them to the IRS. This assessment is called the Trust Fund Recovery Penalty (TRFP) and is equal to trust fund taxes withheld from the employees’ paychecks.

Recently, the Treasury Inspector General for Tax Administration (TIGTA) did an audit to find out if the IRS Collection Field function was taking appropriate and quick action on trust fund cases. The TIGTA found slow Trust Fund Recovery Penalty actions, “expired assessment statutes, unsupported collectibility determinations, and incomplete TFRP investigations associated with installment agreement and currently not collectible cases.” Basically, what TIGTA found was that of the 265 cases that were reviewed, 37% (99 cases) were characterized with TFRP actions that were delayed or inadequate. Moreover, 59.5% of those 99 cases showed that it took on average 1.36 years (500 days) to both review and process the TFRP assessment.

TIGTA concluded that the real problem with delays in the TFRP process is that the business’s or taxpayer’s ability to pay the payroll taxes owed declines as time progresses, making it more difficult or less likely that the IRS will collect what is owed. TIGTA included recommendations to improve this process.